Freelancer or Employee?

Why establishing status in the workplace is important

Taking on freelancers can be a useful route for fast-growing businesses needing support or expertise on short-term projects. However, freelancers might become eligible for benefits that permanent staff enjoy and breaching employee or workers’ rights can happen all too easily. The challenge is that no single test truly determines whether a person is a genuine freelancer or in fact an employee.

It must always be considered whether your self-employed freelancer is also a worker. The two are not mutually exclusive. A worker would include those freelancers who are employed under a contract where they personally provide services but does exclude those in business on their own account. For example, a bookkeeper who is working for a number of clients.

It is important to note that workers have a number of rights that employees enjoy such as being entitled to the Minimum Wage and holiday pay and protection under the Equality Act and other legislation.

The ability to bring in people with niche skills on a project basis without making a long-term commitment can be appealing. This option is particularly suitable for the creative and digital industries where their client’s needs will change in an ever changing technological revolution. The downside, of course, is that essential skills can be lost if the freelancer decides to turn down your work for a better paying contract elsewhere.

I frequently advise people who, despite working under the title of being a freelance consultant, really are an employee in the eyes of the law. Over time they have become an integral part of a business and are no longer in a position where it is acceptable for them to turn down work, or to choose when they work. An example could be a designer who used to work on and off for a range of clients on a project basis, but who now works permanently on a regular basis – working closely with other employees and under closer supervision of an in-house Project Manager.

A distinguishing factor between a genuine freelancer and an employee is how much control the individual is subject to during their work. The more their work is controlled by the organisation, the higher the likelihood that this is really an employer/employee relationship.

However, the main difference between a freelancer and an employee is that in the case of the former, there is no mutuality of obligation. In practical terms, that means there is no obligation for the business to offer paid work and for the freelancer to agree to accept this work. This is why Consultancy Agreements often contain a substitution clause which enables the freelancer to substitute someone else to carry out the work on their behalf, so they do not have to carry this out personally. However, if this option is never used then the contract could be considered to be “a sham”. So it is important to try and ensure that these terms are actually carried out in practice, even if this is only once!

If an individual who was originally hired as a freelancer is now working exactly the same days every week, under the control and management of a business, and their work is an integral part of what the business does, chances are that legally they will be deemed to be an employee. This would entitle them to a whole range of additional employee benefits and rights – perhaps most notably the right to bring a claim for unfair dismissal.

The key for HR managers and owners is to have a firm grasp of the different terms used for an individual’s status such as contractor, employee and worker and the accompanying rights and obligations each of these categories bring.

Ultimately, a genuine freelancer has more control, they decide how and when to do the work required, they can substitute someone else to do this work on their behalf and they can even turn down this work. They enjoy a degree of autonomy which is the reason many freelancers choose to work in this way.

But what starts out as a short-term, self-employed contract can easily end up developing into something which closely resembles an employee/employer relationship.

Interestingly, the Office of Taxes Employment status report published this March recommends a new “statutory employment test” to provide certainty for parties to assess employment status for tax purposes. The choices are either a simple test or a much more detailed test which incorporates case law. However, the concern is that even if for example they used a simple test such as the so- called 80% test, (where if more than 80% of an individual’s work is derived from one source) then they are really an employee. This would mean that a significant proportion of existing contractors and freelancers would be counted as an employee, which would mean much higher costs for hirers.

This would not encourage businesses to expand.

As this Tory Government is keen to be seen as the guardians of a thriving and growing economy who wants to rid everyone of red tape they are unlikely to embrace these recommendations.

Unfortunately, as status cases are always fact based and based on a multiple test, the reality is that there really is no alternative but for businesses to carry out their own regular audits to assess whether the original intended contractual relationship is still reflected in working practice.

This is the only way of ensuring that most of the common problems we come across will not arise. These include demands from HMRC for unpaid taxes, non-payment of holiday pay for both employees and workers and unfairly dismissing someone who has employment rights